Siemens 2006 Annual Report Download - page 163

Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated and per share amounts) 159
consideration the inherent risk evident in the underlying assets. The remaining amount of
total shareholders’ equity is shown under Operations. Income taxes are allocated to Elimina-
tions, reclassifications and Corporate Treasury, Operations and Financing and Real
Estate by applying the effective tax rate of Siemens to the income before income taxes of each
respective component. Deferred income tax assets and liabilities are allocated to these compo-
nents based on available component specific information and applicable proportions of such
amounts to total assets and liabilities of Siemens. The financial data presented for the Opera-
tions and Financing and Real Estate and Eliminations, reclassifications and Corporate
Treasury components are not intended to purport the financial position, results of operations
and cash flows as if they were separate entities under U.S. GAAP.
The information disclosed in these Notes relates to Siemens unless otherwise stated.
2 Summary of significant accounting policies
The presentation of certain prior year information has been reclassified to conform to the
current year presentation.
In connection with the investigation launched by German state prosecutors on November 15,
2006 (see Note 33), Siemens initiated an internal investigation into certain transactions and
payments, which led to adjustments to the Company’s October 1, 2003 Shareholders’ equity
balance to correct for income tax related misstatements in years prior to fiscal 2004 and recog-
nized charges in its fiscal 2006 Consolidated Statements of Income to correct for income tax
related misstatements in the fiscal years 2005 and 2004, respectively. The charges recognized
for fiscal 2005 and 2004 had the effect of reducing both Income from continuing operations
and Net income by €42 in the 2006 Consolidated Statements of Income (thereof €17 refers to
fiscal 2005). The total adjustments relating to years prior to fiscal 2004 had the effect of
decreasing Shareholders’ equity as of October 1, 2003 by €95. The misstatements for fiscal
2005 and 2004 were not material to those years and the charges recognized in 2006 to correct
the misstatements of those years were not material to the Consolidated Financial Statements
for fiscal 2006. In addition, the adjustments to Shareholders’ equity as of October 1, 2003, to
correct the cumulative misstatements as of that date, were also not material to beginning
Shareholders’ equity as of October 1, 2003. In connection with the adjustments related to years
prior to fiscal 2004, the Company’s deferred tax assets decreased by €88 and the tax accruals
increased by €7 as of October 1, 2003. The adjustments recognized for fiscal 2005 and 2004
resulted in an additional decrease of the Company’s deferred tax assets of €32 and an increase
in tax accruals of €10 as of September 30, 2006. For further information see Notes 8 and 33.
The Company has also adjusted certain expenses previously recorded in Research and
development expenses in 2005 to Cost of sales. Such adjustment was necessary to properly
classify costs related to the adaptation of existing technologies to meet specific commercial
customer requirements in Cost of sales. This adjustment has no effect on Income from contin-
uing operations before income taxes or Net income. For fiscal 2005, €644 was reclassified from
Research and development expenses to Cost of sales in connection with this adjustment.
Research and development expenses therefore decreased from €5,155 to €4,511 for the year
ended September 30, 2005. At the same time, Cost of sales increased from €53,502 to €54,146
for the year ended September 30, 2005.
For the year ended September 30, 2006, the corresponding costs related to the adaptation of
existing technologies to meet specific commercial customer needs amounted to €661.
Notes to Consolidated Financial Statements